Credit Cards Rewards
Banks reward credit card users (or rather entice them) with air
miles or cash back in return for spending on their cards. Advocates
of Mileage Credit
Cards tend to shun the other camp (and likewise for Cash
Back Credit Cards users). There will never be a clear-cut winner
on which type of credit cards are better but understanding the following
factors will give you a clearer picture on where you stand.
Value of Reward
The valuation of a mile is something that differs greatly among
credit card users (see Value
of a KrisFlyer Mile for Singapore context). It can have zero
value for someone who doesn't like to fly or who will never accumulate
enough miles to fly to anywhere but it can have a value as high
as 5.48 cents if you are an aspirational flyer
that seeks to fly First Class and enjoy the cream of the crop of
commercial airlines. We prefer to be conservative and assume a value
of around 1.24 cents for a KrisFlyer mile as it
is the average implied value of a mile if one were to redeem SIA
Economy Class flights to all available destinations.
With mileage credit cards offering as high as 4 air miles per dollar
on everyday spend (see Best
Credit Cards for Air Miles), it can be translated to as high
as 22% rebate (4 * 0.0548 = 0.219) for your everyday
spend if you were to redeem your miles for First Class air tickets.
The average spender who will never spend enough to redeem First
Class air tickets can still achieve a respectable base scenario
of 4.96% rebate (4 * 0.124 = 0.0496) if he were
to redeem his miles for Economy Class Tickets although he might
take a year or more to accumulate the required miles according to
our calculations (see How
Much to Spend on Credit Cards for Free Flights).
On the other hand, the valuation of cash back is simply a hard
solid number that is easy to understand and one can achieve up to
10% rebate if you use the right cash back credit
cards although a more realistic number is at best 5% rebate
for everyday spend (see Best
Credit Cards for Cash Back).
Our Take : Mileage
Credit Cards win this one here as there is a higher potential
rebate as compared to cash back credit cards. Notice that 4.96%
rebate is a base scenario for everyday spend for mileage
credit cards but 5% rebate is considered a high
rebate for everyday spend for cash back credit cards? This only
enforces the view that mileage credit cards provide more bang for
bucks if you play your cards correctly when paying your bills.
Users who prefer almost instant gratification on their spending
will prefer cash back credit cards. We say "almost instant
gratification" because most cash back typically only gets
credited into your credit card account after your credit card payment
due date and this might take anywhere from less than a month to
even a quarter of a year. Banks do this to make sure you actually
pay for your bills and that you continue spending on their credit
Comparatively, the time taken to accumulate Krisflyer miles for
travel (equating air miles to Krisflyer miles as that is the most
popular mileage redemption for Singaporeans) might differ from one
person to another but one has to spend at least $3,750 on credit
cards to redeem a return economy ticket to the cheapest Singapore
Airlines redemption destination (see How
Much to Spend on Credit Cards for Free Flights).
Simple arithmetic will tell you that one will need at least 2 to
3 months to clock that $3,750 on your mileage credit card based
on an average Singaporean everyday spend. Add in the time taken
for the points or miles to be transferred to your credit card account
after which they will need to be transferred to your Krisflyer account
and you will be looking realistically at a time frame of at least
3 to 4 months before you can start scouring SIA website for dates
to redeem your nearby getaway.
However, short haul flights for nearby getaway provide poor value
for your miles and if you really want to get more value out of your
miles, one will need to spend at least $7,500 to redeem a return
economy class ticket for destinations further than Southeast Asia
(Zone 4 and above on SIA redemption chart). This also means a longer
time frame of 6 to 8 months on average everyday spend.
If your aim is to maximise value out of your miles, than you will
be looking to spend at least $8,750 to redeem a return business
ticket to the cheapest Singapore Airlines redemption destination
for business class tickets (Zone 2 on SIA redemption chart) and
that will be an even longer time frame of 7 to 9 months based on
average everyday spend.
Hence, mileage credit cards are really more suitable for high spenders
who can shorten the time frame needed to redeem air tickets for
travel. One can also time large purchases with Miles
Signup Promotions to earn miles at a faster rate but unless
you are only aiming for one-off redemptions, it is more advisable
to go for cash back if you are a low to average spender. Average
spenders can earn air tickets for travel through mileage credit
cards but they will have to be realistic and understand that it
probably will take a year or more to redeem a return economy ticket
to any destination outside Southeast Asia.
Our Take : Cash
Back Credit Cards are better for the average Joe if the time
taken to receive your reward (cash back or miles) is important to
Store of Value
Due to the longer time taken to accumulate enough miles for a flight
redemption as compared to the almost instant cash back, it results
in the problem of opportunity cost for miles chasers. Air miles
do not earn interest as compared to cash which stays in the bank
because of a lower credit card bill due to cash back. The interest
might be negligible due to the low interest rate environment but
it offers some returns nonetheless. Comparatively, air miles stored
in your frequent flyer account doesn't earn any returns and has
a higher probability of getting devalued as airlines frequently
increase the number of miles needed for redemptions (sometimes without
any advance notice). Even if it doesn't get devalued, miles has
a limited lifespan as they come with an expiry date (3 years for
KrisFlyer miles with option to extend by half year for a fee). This
makes it tougher for anyone to accumulate enough miles for a dream
Our Take: Cash offers a better store of value than air miles and
you should pick Cash
Back Credit Cards to ensure that the bird in the hand stays
in the hand if you prefer hard assets that has a definite value
Ease of Earning
This is a major headache for cash back chasers as
banks are constantly moving their goal posts (sometimes with very
little advance notice) when it comes to the minimum requirements
and maximum cash back cardholders can receive. Minimum requirements
come in many forms and banks are actually pretty innovative when
it comes to making it more difficult for people to receive cash
Typical requirements are minimum monthly spend, exclusion
of cash back for specific categories, tiered cash back in combination
with minimum spend, opening and maintaining bank accounts, minimum
spend on other categories that don't earn a higher cash back, minimum
monthly spend for a consecutive number of months, etc.
Banks also constantly tweak the numbers for minimum
spend and maximum cash back to disadvantage cardholders and cash
back credit cardholders have to be constantly on the ball to look
out for such changes.
Mileage credit cardholders also face similar concerns
in terms of exclusion of earning of miles for specific categories
and maximum miles one can earn in a month or a year but are generally
faced with much fewer requirements and higher or no maximum cap
as compared to their cash back seeking counterparts.
Our Take : Mileage
Credit Cards are clearly superior against cash back credit cards
in this case as it is far easier to earn miles as compared to cash
back with fewer minimum requirements and higher maximum cap.
Hidden Costs and Benefits of Mileage Credit
Banks usually require a conversion cost or annual fee to convert
your points or miles in your credit card account into miles in your
frequent flyer account. Typical fees are low at $25 to $40++ (See
Card Air Miles Redemption Rates) but it adds on to the cost
of redeeming miles and should be taken into account.
Points or miles earned per transaction on mileage credit cards
are also frequently subjected to rounding which can often result
in earning fewer miles than advertised headline mileage earn rates.
In extreme examples such as UOB
Credit Cards, cardholders can only earn miles in blocks of $5
spend and that means if a cardholder where to spend $4.99 on a single
transaction, he would earn 0 miles from that transaction instead
of the advertised headline mileage earn rate.
Another hidden cost is the risk of orphaned miles. Orphaned miles
are miles in your credit card or frequent flyer account that do
not meet the minimum conversion or redemption amount and are wasted
if left to expire or used to redeem less attractive rewards.
Flight redemptions are subjected to availability and it is extremely
difficult to redeem tickets for highly sought-after routes like
Singapore to London or New York without being put on the waiting
list. Using miles for flight redemptions instead of paying with
cold hard cash also means a traveller loses out on opportunity to
accumulate miles from the flight. The lost is compensated with the
flexibility gained to cancel the flight redemption subject to a
small cancellation fee. This usually wouldn't be possible if one
has to cancel a flight booked using the cheapest promotional fare.
The best reward for any credit card user depends on individual's
preference. Mileage credit cards tend to suit high spenders who
are willing to wait longer for their handsome rewards and with a
penchant for luxury travelling (business or first class flights
specifically) while cash back credit cards are more suitable for
practical users who are low to average spenders that prefer almost
instant gratification for their spending through trimming their
credit card bills.
It is more straightforward to earn miles on mileage credit cards
as compared to earning cash back on cash back credit cards which
are faced with many requirements. However, the value of cash back
itself is easy to understand as compared to miles which has a wide
range of values depending on the type of redemption. Cash back is
also a better store of value as compared to miles which might get
devalued. There are also hidden costs and benefits associated with
collecting and redeeming miles which credit card users need to be
aware of before embarking on the mileage collection journey. To
conclude, it is easier to earn miles with mileage credit cards but
more difficult to keep and use the miles earned.
It is really up to an individual's preference when it boils down
to cash back or miles although we have done the math involved and
proved that most low to average spenders will be better off collecting
cash back due to the larger amount one needs to spend for a redemption
that offers good value for your miles (see How
Much to Spend on Credit Cards for Free Flights). One can theoretically
weigh the pros and cons of using cash back or mileage credit cards
for every individual purchase so as to get the best of both worlds
but it is unrealistic to do so as it would mean spending much more
than you actually intend to do.
It is worth noting that it is perfectly within the rights of banks
to alter the minimum requirements, maximum cap and even the cash
back or mileage earn rate for both cash back and mileage credit
cards at their own discretion. This can take place at little or
no advance notice and cardholders are pretty much at the mercy of
the banks in the game of credit cards.